An alternative to cannabis receiverships: How the ACA model improves the process
By Dotan Y. Melech
As long as cannabis remains a Schedule I drug under the Federal Controlled Substances Act, cannabis businesses cannot seek bankruptcy protection. A severe consequence—and prime reason for current industry woes—is that financing for standard operating costs like cultivation equipment, extraction machines, real estate improvements, and human resource support is often difficult to secure. Potential investors are wary of the enhanced risks that burden the industry and are not inclined to invest in struggling businesses.
These distressed cannabis businesses can turn to receivership as an alternative to bankruptcy when funding options are not available, but cannabis receiverships are not always the best fit for the situation. While receiverships are useful under certain circumstances, they operate under the purview of the courts, and often are adversarial, expensive and time-consuming. Receiverships also are punitive in nature, leaving creditors, operators, and owners equally frustrated with the outcome.
The current challenges facing cannabis businesses today are well documented and have risen to both creditors’ and regulators’ attention, but a solution beyond receivership has not been embraced in legal markets despite the obvious necessity.
At UnitedCMC, we’ve seen the best and the worst of the receivership process in our work. And our firsthand experience handling distressed assets and mitigating business losses informed our development of a better model: The Administrative Collateral Agent (ACA). Here’s a closer look at how an ACA works differently from the receivership process, and the advantages for stakeholders, from regulators to business owners and investors.
How the ACA Model Benefits Cannabis Business Stakeholders
The UnitedCMC solution starts with an individual—an Administrative Collateral Agent (ACA)—approved by and accountable to state regulatory boards without the need for initial court intervention and oversight. When an ACA is tapped to address issues surrounding a cannabis company in distress, it benefits borrowers, lenders, and regulators alike by offering a more cost-effective and less punitive option to courts, receivers, and lawyers. The ACA facilitates mediation between parties and creates alignment that is currently lacking within the industry.
With a goal of establishing a less expensive, directly accountable, and more efficient process than a receivership, the ACA takes over management of the cannabis business and acts accordingly to satisfy obligations to creditors. The vastly improved process is possible thanks to the ACA’s ability to work without court approval or intervention. The ACA is accountable to similar statutory and regulatory powers that receivers possess, and operates in a similar manner to receivers, but the entire process is streamlined.
With each interested party benefiting from the ACA process, cannabis entities might be inclined to seek assistance more readily and voluntarily before problems snowball and conditions deteriorate to a place where liquidation and sale of licenses are the only options left.
Regulatory Requirements For Administrative Collateral Agents
The ACA must have regulatory support in order to operate properly. If they have not already, state regulatory boards need to promulgate regulations that are similar to those that exist for cannabis receivers. Here’s a checklist the UnitedCMC team has assembled, based on our experience working in multiple state markets:
- Define an “ACA”
- Draft regulations for the procedures and requirements of an ACA
- Add a category of agent registration card for ACAs which meets similar requirements as a cannabis receivership agent card and is subject to revocation
- Establish a process for an ACA to register with the regulatory board (keeping the same requirements for a receiver’s registration)
- Establish provisions regarding the role, obligations and powers of an ACA
- Establish provisions regarding the parties whose interests an ACA represents (e.g. the board, creditors, the licensee, etc.)
- Establish provisions regarding the process for taking certain actions, such as, nonroutine sales of product and the proposed sale of licensure
- Craft liability protections for an ACA
- Create limitations on creditors to directly control ACA activities
- Establish reporting requirements by an ACA to the regulatory board
In UnitedCMC’s view, ACAs are valuable tools for state governments and regulators. It is in their best interests to assist cannabis businesses in the face of continued federal prohibitions and restrictions.
The level of trust, transparency, and complementary positioning with industry participants that an ACA can bring will provide supportive relief for a cannabis industry in need of more options and flexibility. Ultimately, we believe that this tool provides an alignment between regulators, operators, and lenders that is currently lacking in the industry.
The UnitedCMC team works extensively with all cannabis stakeholders: business owners, attorneys, consultants, creditors and regulators. If you are interested in learning more about our ACA services, please reach out to UnitedCMC today.